Joe Rice, Managing Director

The Department of Labor (DOL) issued a final rule on April 23, 2024 that substantially increases the salary thresholds for overtime exemptions under the Fair Labor Standards Act (FLSA). Effective July 1, 2024, the salary level required for exempt status will rise from $35,568 per year to $43,888 per year. A further increase to $58,656 is set for January 1, 2025. These adjustments aim to expand overtime eligibility to millions of workers. Employers now need to decide — increase pay for exempt employees paid below the new salary threshold to maintain the exemption, or reclassify these employees to non-exempt, track hours, and pay overtime to comply.

Key Considerations

• Compliance Considerations — Increase Pay or Not? Employers must decide whether to increase salaries to meet the new thresholds or reclassify employees as nonexempt. This decision should be informed by a cost-benefit analysis, considering both the immediate impact of the 2024 change and the forthcoming, more significant 2025 increase. Financially, it may be more viable to increase salaries if employees frequently work overtime.
• Consideration of Triennial Updates. Employers should be wary of the triennial updates to the salary thresholds, scheduled to begin on July 1, 2027. These updates are based on the 35th percentile of weekly earnings of full-time salaried workers in the lowest-wage Census Region, as recorded in the Current Population Survey. This methodology could lead to substantial and unpredictable increases in salary thresholds. As lower-wage salaried workers transition to hourly roles or receive raises to maintain exempt status, their removal from the data set — or the inflation of their wages — could dramatically escalate the threshold. Consequently, routinely raising wages to preserve exempt status may become an unsustainable strategy in the long term.
• Administrative Burden of Tracking Hours. Reclassifying employees to nonexempt status introduces the need for meticulous tracking of work hours. This change imposes administrative burdens on employees who now find themselves having to track time and account for time away from work for things like doctor's appointments. There is increased burden for supervisors to review and approve time as well as payroll personnel who must ensure accurate recording of hours worked, including overtime. This collective burden is another factor in maintaining exemption by increasing wages.
• Employee and Supervisor Training. Transitioning to a system that includes nonexempt employees necessitates training for both workers and their supervisors. Employees will need to learn how to log their time correctly, and supervisors must understand the nuances of managing overtime to avoid unauthorized or excessive overtime that can inflate labor costs.
• Evaluate Pay Compression If salaries are increased to meet the salary thresholds, pay compression could become an issue as past pay differences are diminished. Employers should assess the impact of raising wages on internal salary equity and consider broader compensation adjustments to maintain meaningful differences in pay due to performance, experiences and/or hierarchy.

While there is potential for legal challenges, similar to those seen with the Obama administration's 2016 overtime rule that was blocked by the courts, it is prudent for employers to prepare for the implementation of these changes. The previous challenges primarily objected to significant jumps in salary thresholds, which were seen as too abrupt and outside the authority of the DOL. Despite the potential for similar objections to the 2025 increase, employers are advised to proceed with preparations under the assumption that the rule will be upheld, ensuring compliance and readiness for the changes ahead.

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